Inputs:
Stock Price – The current price of the underlying asset that is being analyzed.
Stock Volatility – Measures the underlying assets absolute price movement. Buy or Sell– This calculator will allow you to evaluate either a short or long Straddle/Strangle position by selecting Buy (long position) or Sell (short position).
No. of Options Contracts – The number of contracts for each Buy or Sell position of your Straddle/Strangle. Remember, each contract represents 100 shares of the underlying asset.
Expiration Date – Options are wasting assets that have defined dates of expiration. The expiration date is usually the third Friday or Saturday of every month. The Expiration Date link will provide you with an expiration calendar.
Strike Price – The share price that the underlying security can be purchased (Call Option) or sold (Put Option) by the option holder upon exercise of the option contract.
Options Price – The option premium price for each position. For Buy positions, you general buy at the ask. For Sell positions, you generally sell at the bid.
Outputs:
Net Credit/Net Debit – The amount of money that is credited (deposited) or debited (depending on whether it's a short or long position) from your account. This is your maximum profit or loss (again depending on the type of position initiated).
Max. Loss – The maximum amount of money you could lose if the stock price moves against your position.
CAUTION: In a short straddle/strangle, the loss is UNLIMITED. For the purposes of the above calculations only, I have fixed the loss as 3X the credit. By the same token, on a long straddle/strangle, the max. profit is UNLIMITED. Again, for the purposes of the above calculations only, I have fixed the loss as 3X the debit.
Breakeven – The market price that a stock must reach for the options buyer or seller to avoid a loss if they are excercised or assigned.
Prob. Of Profit – Determines the probability of success for the straddle or strangle position based on a normal distribution. Calculates the probability of the underlying asset trading between the two breakeven prices.
Expected P/L – The return that an investor might expect to make on an investment if he/she were to make exactly the same investment many times throughout history. Ideally, you would like this value to be a positive number. For high probability straddles or strangles, it may be difficult to achieve a positive expected P/L however, if you understand your maximum loss required for a positive return, you can exit your position accordingly if the price moves outside of your target.
Max. Loss for Positive Return – The theoretical loss your position can withstand to achieve a positive Expected Return.
The Straddle/Strangle Calculator will calculate Expected Profit/Loss and Probability of Success and weigh your potential Profit and Losses by probability of each event happening. If this value is positive, it is more likely that you will make money with this strategy. However, if it's negative, the Straddle/Strangle Calculator will calculate the Maximum Loss required to achieve a positive value. This becomes your exit point. The "ideal" trade is one that has a positive Expected P/L with a Probability of success greater than 50%.
